Development European digital currency without direction

The European Central Bank doesn't seem to be unified on the development of a digital currency and that makes things very confusing. Not everybody within the organization is convinced by the need for a central bank digital currency. Others believe that the ECB needs do more research. Among them is ECB official Jens Weidmann, who made clear that banks and commercial entities should be the first to come up with faster payment solutions.

Weidmann urged banks to develop cheaper and faster payment solutions that counter the Libra stablecoin project. The German ECB official made these statements in an interview with the German financial newspaper Handelsblatt. However, he's not referring to the development of a central bank digital currency.

"In a market economy it's first up to the companies to create a corresponding service based on customer requests", the newspaper quoted him. Weidmann doesn't want to call upon the state immediately, and therefore he's not thinking about a central bank digital currency or a digital euro. At the same time he first wants to define the pros and cons of a CBDC, before making decisions.

This Friday the ECB published a new report about 'Tiered CBDC and the financial system'. In the report they suggest to develop a digital currency that's best to use in small amounts. When people own large amounts of the digital currency, they also need to pay a high interest. That way the ECB wants to stimulate people to keep using traditional banks.

ECB wants to stay ahead of the curve

It's very evident that there's no clear consensus about the development of a digital currency within the European Central Bank. The ECB has been talking about digital currencies since the summer of 2019. In November they were considering to launch a digital euro alongside a framework to assess the risk of specific cryptocurrencies. The ECB would work together with national central banks from within the European Union in order to develop this digital euro.

One week before Christmas the ECB reportedly build a proof-of-concept for anonymous transactions using a central bank digital currency. The system would use so-called anonymity vouchers, which would only be available for low-value transactions. The ECB underlined that they need to work more before such a system would be implemented.

A week before the report ECB president Christine Lagarde stated that the European Central Bank wants to stay ahead of the curve in its efforts to issue a digital currency. Lagarde sees stablecoins, like Libra and Tether for example, as serious threats to the position of the euro.

Confusing times

Should there be a digital euro? Should it replace the physical one? What will the roll be for national banks, and what's the relationship between these banks and the European Central Bank? Is a central bank digital currency only used for buying coffee, or also for buying a house? These are questions worth asking, but the ECB doesn't have a clear answer yet.